The 1997–1998 Asian Currency Crisis

This chapter covers intermarket reactions to the Asian currency crisis that occurred between 1997 and 1998. The most important result of that crisis was the dramatic decoupling of bond and stock prices. Those market reactions were a dress rehearsal for the intermarket model that dominated the following decade. One intermarket lesson resulting from that crisis was a warning that falling bond yields (rising bond prices) after 2000 would not have the same positive effect on stocks that it had prior to 1998. The two deflationary events of the 1990s were the collapse in Japanese stocks in 1990 and the collapse of Asian currencies during 1997. Japanese deflation over the last two decades may help explain the persistent decline in bond yields in the United States. A positive correlation has existed between the trend of Japanese stocks and U.S. bond yields.

The Asian Currency Crisis Starts in 1997

During the summer of 1997, the currency of Thailand started to tumble. It was a trend that soon spread to other currencies in that region. The collapse in Asian currency markets caused a corresponding collapse in Asian stock prices, which had a ripple effect around the globe. Fears of global deflation pushed commodity prices into a free fall and contributed to a worldwide rotation out of stocks and into Treasury bonds. Over the following year and a half, the CRB Index of commodity prices fell to the lowest level in 20 years.


The CRB ...

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